Denny’s Sales Continue to Climb in First Quarter

SPARTANBURG, S.C. – Denny's Corporation (Nasdaq:DENN) reported on April 28 that same restaurant sales in the United States increased 1.8 percent in its first quarter ending March 26, 2014. Denny's company-owned restaurants increased in same restaurant sales by a grand 3.2 percent compared to a quite respectable 1.5 percent increase in domestic franchised restaurants.

"We are pleased to start the year with another quarter of system-wide same-store sales growth highlighted by our strongest quarter of same-store sales at company restaurants in over seven years," stated Denny's chief executive officer John Miller. "Same-store sales of domestic franchise restaurants increased 1.5 percent, primarily due to an increase in same-store guest check average given by both higher menu pricing and favorable product mix."

Bucking the trend

That positivity is remarkable considering the company is in a segment that has contracted in average customer traffic and restaurant sales through the years. It is also quite an accomplishment given the state of the economy. Data from the U.S. Commerce Department from a preliminary estimate last Wednesday reported that the country's gross domestic product increased by an annual rate of a meager 0.1 percent in the first quarter of 2014 compared to the same period last year. That gives credence to restaurant chain leaders complaining in their earnings calls to analysts that customers had stayed away, having been affected by harsh winter weather.

Chart:BlueMauMau, Data: Denny's

"I think the franchisor and franchisee relationship is the best it's been in the 37 years since I've been at Denny's." states Jim Wainwright to Blue MauMau. Mr. Wainwright is a board member of the independent Denny's Franchisee Association and a Denny's franchisee.

"He is an incredible leader. He listens," enthuses the franchisee about CEO Miller. Wainwright stresses Denny's strong collaboration with franchise owners and their independent association. "Before Denny's Corporation does anything they run it by us," says the multiunit restaurant owner about the importance of franchisees in the Denny's system since Miller arrived. "We know that the final decision is by corporate," he adds.

The elected board member of the independent Denny's Franchisee Association notes that he has had conversations with suppliers who deal with other major franchising brands. Those suppliers are astounded by how well Denny's gets along with its franchisees. "It makes me proud to be associated with the Denny's brand," says Wainwright.

That system built for franchisee collaboration and its cooperative culture is evidently getting results.

It is not just this quarter that Denny's has experienced positive same-restaurant sales. Wainwright points out that since John Miller came on board as chief executive officer in February 2011, Denny's has had eleven in the last twelve quarters of positive same store sales (see chart).

Denny's limits giveaways and raises average ticket price

Despite harsh winter weather in the United States, Denny's company restaurants saw an uptick in customer traffic as well.

"We were up about 0.4 in the quarter on company traffic," said CEO Miller to analysts. He attributes the uptick in restaurant traffic to recent remodels at company-owned stores. Miller was quick to imply that positive traffic should be making its rounds to franchisees as their stores reimage. "Our franchisees have a seven-year remodel requirement, which means approximately 70 percent of the system will be remodeled over the next five years," he stated.

Chart: Blue MauMau. Data: Denny's

Business owner Wainwright doubles down on what the CEO said: "My restaurants are up 3 percent over last year." He says that higher sales growth is because his restaurants are further into the remodeling process than the system average. "I am bullish that my restaurants will be up 3.5 – 4 percent this year," adds the Colorado-based multiunit franchisee.

The owner-operator stresses bottom-line earnings: "The remodel isn't cost prohibitive so that franchisees can still make a profit." He knows that is the case from his own store remodels and because the Denny's Franchisee Association has a development advisory board that has been integrated with the franchisor to help create a store upgrade that has pushed down remodel costs.

Denny's CEO Miller spoke with analysts on how Denny's tweaked its 2-4-6-8 value menu to push up restaurant earnings. "Our $8 items…included free beverage and so we just eliminated that," he explained to illustrate removing a food cost to raise the average ticket profitability.

Unfortunately, the good news was coupled with bad. The network had a net loss of 4 restaurants from its 1,700 units in 2013. A major company-owned restaurant in Waikiki closed and a landmark Denny's in Las Vegas has been temporarily closed. That unit shrinkage, along with other factors, dropped the company's revenue by $2.6 million and hit its profits hard. Its first quarter net income compared to last year dipped by nearly 10 percent.

The good news is that the company anticipates a slight net increase in its network, between 5 and 15 restaurants. The CEO told analysts that franchise same-store sales should increase between 1 and 2 percent for the year.

The chain has 161 Denny's owned units and 1,535 franchised restaurants. The average unit volume for company-owned restaurants was $498,000 for the quarter, while franchised restaurants had average sales of $356,000.